Wednesday, January 03, 2018

The Inevitable Death of Social Security and the Better Alternative

Social Security is dying.

That's a politically charged statement, which is unfortunate, because it shouldn't be a political topic; this is a question of math.

The quick version: Social Security was designed generations ago during a time when it was assumed that subsequent generations would be larger, or at least as big, as the previous, that there will always be as many workers tomorrow as there are today. The "baby boom" following the Second World War seemed to confirm the hypothesis, but what followed completely derailed it. And now comes the automation wave.The system requires working people to run, but society is moving toward having fewer workers.

The system will fail. The system is failing.

If you don't believe this, go to My Social Security, the website maintained by the Social Security Administration, log in, and look at your benefit statement. On page two, right under the breakdown of benefit payments you personally are set to receive one day, there's a footnote in bold print:
 "Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2034, the payroll taxes collected will be enough to pay only about 77 percent of scheduled benefits."
They put it right there in black and white: the system is running out of money. Taxing us more won't fix it, because the simple fact of the matter is that we're running ever-lower on working people to be taxed to support it.

Do you see another baby boom on the horizon? I don't. Look at popular media: the message is, in so many different ways, "do not have children."


Several years ago there was a "Social Security tax holiday" that occurred under the Obama administration. It was a 2% reduction in the employee-portion of the Social Security tax withheld from people's paychecks. This lasted for two years.

While most people spent the difference, I put all of it into a Roth IRA account. I did this specifically because I wanted to demonstrate what privatization of the Social Security retirement system could do. I put only these funds into the account, and have reinvested the dividends and capital gains ever since. Each year I like to update anyone who is interested on the numbers.

The portfolio is composed of a mix of dividend paying stocks, exchange-traded funds, closed-end funds, etc., which are selected to achieve a diversity of industries and sectors, and for the income they provide. When I see an opportunity to trade a position that has gone up in value for an attractive opportunity offering a higher yield, I make the switch. Until then, I simply let dividends reinvest. Primarily it is the income of the portfolio that I track, because I believe spending income, not principal, is both the key difference between a portfolio built to last one's lifetime, and a broken idea like Social Security that constantly "eats the seed corn."

In 2017, the income of the portfolio grew by 29.63%. Since I began tracking the income growth on August 5th, 2014, it has grown 60.76%. The value of the portfolio since I ceased funding it when the Social Security tax holiday ended has increased by approximately 71.6%.

Thus far, between myself and employers, I have had nearly $66,000 vacuumed up by the Social Security tax. Were this money in my private retirement account as I have it constructed, it would be generating around $5150 in dividends per year, reinvesting at a current yield of 6.7%. If I also merely take an average of the Social Security taxes taken from me in my working life (twenty-four years, thus far), and add that in as an annual contribution, only an additional $2750 per year, in 20 years when I reach the minimum Social Security retirement age of 62, the portfolio would be worth $1.56 million, and assuming a consistent dividend rate as today, would yield $104,520 per year in dividends. Pure income, with no need to tap into the principal.

At that age, Social Security promises to pay $1600/month (before accounting for the reduction they're saying there will have to be starting around the year 2034), or $19,200 a year, not even one-fifth of what my private account to do.

It gets worse: since Social Security has no investments supporting it, only current payments from working people that are passed through to those who have retired, you can't even treat the system as a savings account from which one draws their own money one day. However, if we do assume it works this way for the sake of comparison to a true investment portfolio, then we can gauge which one will truly endure, and which one will run out.

At present, I am having about $10,800 per year taken from me for my Social Security benefits (that's right now; I am moving toward changing my income to capital gains, dividends, and rents, which are not taxed by this system, a change that will likely occur within a few year's time). If I assume that I continue working as such for another twenty years to age 62, then added to what has already been taken from me for Social Security, I will have $280,000 "in the system."

At present, the Social Security Administration itself calculates that a man who reaches age 65 today can expect, on average, to live until age 84.3, or 22.3 years beyond the age at which he could begin drawing his minimum retirement benefit (62 years old).

Were that me, then by the time 22.3 years goes by, at $19,200 per year, I will have drawn $428,160 in benefits.

With only $280,000 paid in. Every last penny of my taxes, gone, and $148,160 in addition paid out to me.

Money that has to come from working people.

In a society with fewer births, and more machines.

The math does not work.

Meanwhile, in that same time frame, my portfolio, assuming zero growth of the principal from age 62 on (which is unlikely), would still contain $1.56 million (which could be left to my heirs, or charity), and also assuming no growth in the dividends (also unlikely), would have paid out $2.33 million. This can happen even if there are fewer births in the future, and more machines, because the portfolio would actually be invested in the economy (world-wide, even), not just on the backs of working people here in the United States, as is Social Security. If twenty years from now people are living even longer (very likely), my private portfolio would still be there for me.

It's time to abandon this anachronistic system that is Social Security.

This is not a political matter. It's just math.

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